How to Perform Proper Due Diligence When Buying Commercial Real Estate

There are three key factors that you must focus on when doing your due diligence in commercial real estate acquisitions. Fully understanding these three areas will enable you to be highly successful in acquiring properties.

These three areas are:

1. Verifying the reported income: It is imperative that you prove the reported income by examining each individual rental lease, doing a unit by unit inspection and engaging in a great deal of “sleuth work” utilizing the expertise of a solid management company. Every signed lease being reported by the sellers must be examined for legality and authenticity. If you determine that the current management has a “mom and pop” style, you shouldn’t even consider moving forward with the deal because the management transition would be far too drastic and increase the level of risk as the style of management that you would be putting in place will be highly professional and may alienate the current tenants…. unless you are really interested in buying yourself a job. One idea around this: Insist that the sellers place the property under third party management for a couple of months and then purchase the property based on the stabilized numbers reported by the new management company.

2. Verifying the expenses: Knowing the expense numbers of the sellers isn’t nearly as important as knowing the expense numbers that YOU will be able to run the property with. This is best determined by obtaining an average/unit expense number from several third party management sources in the immediate area of the property. It is also done by verifying each number that is being reported, including everything from insurance costs to lawn care. All numbers must be verified. Fortunately, most expense numbers that apply to running apartment complexes are fixed costs, such as property taxes, and insurance.

3. Verifying the physical condition of the property: Hire a third-party commercial property inspection company to perform a thorough inspection of the properties that you wish to acquire so that you can best determine what the current and future physical problems of the property may be. This is worth every penny and there is no short-cut around it.

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